Dear Opening Credits,
Does having a multitude of store credit cards help or hurt my credit score? Also, does closing out these cards hurt my score? – Susan
Any stack of credit cards has the power to hurt or harm a credit score; it’s how you use and repay what’s owed on them that counts. With this in mind, here is what you need to know about the way credit scores are calculated:
There are two major credit scores in the United States: FICO and VantageScore. Neither differentiates between credit accounts that are affiliated with a specific store and those that are not. Both scoring systems, however, do consider as vital factors your payment pattern, the amount of debt you hold and length of your credit history.
If you have many credit cards you frequently use but always pay on time and maintain a zero balance, your credit scores will benefit. Your scores will rise even further after several years of such payment activity being reported on your credit file. That’s because you’re showing you can handle multiple credit lines without getting in over your head, and lenders will see you as a low-risk customer.
You will be perceived as a high-risk borrower, however, if you accumulate a lot of debt on those cards and miss payment due dates. As you can see, how lenders perceive your creditworthiness has nothing to do with the types of credit card accounts you have but is based on the way you handle your cards and payments.
Know that even if you handle your cards well, your credit score will tank if you don’t keep current on any other bills you may have, which could be reported to the credit bureaus if sent to collections.
If you cancel cards, your credit score could sink for two reasons:
1. An increase in your credit utilization ratio. Let’s say you have a bunch of cards with a combined credit line of $30,000 and a total balance of $10,000 across all those cards. Your credit utilization ratio would then be more than 30 percent, which is high. If by closing a few cards with no balances, your total credit line sinks to $20,000, your overall balance of $10,000 would suddenly be 50 percent. Your scores, then, would nosedive. On the other hand, if you closed a card or two while owing nothing on any of your cards, your credit utilization would remain the same: zero. The impact to your credit utilization ratio, therefore, would be nil.
2. A reduction in the overall age of your accounts. The overall age of your credit accounts is another credit scoring factor, and the longer you’ve had well-managed credit cards, the better. The FICO scoring formula considers the ages of both your oldest and newest accounts, as well as the average across your cards. The general advice is to keep your oldest cards open and active. Closed accounts that were in good standing will still appear on your credit reports for 10 years.
If you are intent closing some of your store cards, don’t close them all at once, and keep the balances on the remaining ones near zero. If you will be in the market for a big loan in the near future, such as a mortgage, wait until you have secured your home loan before you start closing cards to avoid any major credit score fluctuations.
I’m a big believer in only keeping the credit cards you really want. Knowing what you do now, you may choose to close unnecessary accounts. Or keep all of your store cards open, if you profit from the process. Rewards and deals will work in your financial favor if you shop at the stores often, but always pay the bills in full.
Be aware that store credit cards do tend to have much higher APRs than general purpose cards, so if you do carry a balance on them it will cost you big. Therefore, if you choose to spread the cost of something out over a few months, a non-retail card with the lowest APR is the way to go.
From this point forward, be judicious when applying for credit cards. It’s tempting to take advantage of any new store card offer that’s presented while you’re shopping, but an overabundance of applications will also bring down your credit scores as lenders check your credit each time you apply, resulting in a temporary ding to your score. You also could end up with a wallet bulging with excess plastic.